Auto Loan for Credit Building

[djshaggy]

I find myself in a situation where I need to get a car. I have found a used car for $4500.

I have the cash on hand to pay for the car outright, but am wondering if I should take out an auto loan instead becuase I don't have a good variety of credit types on my youngish credit history.

I have a current Equifax score of 672. It was 680 a two months ago, but went down as I added my first card in 3 years. Again with the intent of building my score.

I have a very low debt/income ratio becuase I pay off my cards very frequently. I have no other debt.

The only items I have on my credit profile are these two credit cards. Would adding a 24 month auto loan help my score in the long run?

Thanks

[ceejx]

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@djshaggy wrote:

I find myself in a situation where I need to get a car. I have found a used car for $4500.

I have the cash on hand to pay for the car outright, but am wondering if I should take out an auto loan instead becuase I don't have a good variety of credit types on my youngish credit history.

I have a current Equifax score of 672. It was 680 a two months ago, but went down as I added my first card in 3 years. Again with the intent of building my score.

I have a very low debt/income ratio becuase I pay off my cards very frequently. I have no other debt.

The only items I have on my credit profile are these two credit cards. Would adding a 24 month auto loan help my score in the long run?

Thanks

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An extra positive credit line, and credit mix will always help, especially in the long run, and even if it only posts for a month, it will still be a TL on your report for 10 years after your last payment. The problem is the amount of money you'll be paying for the loan between loan origination fees, and interest, so you want to make sure you figure all that out to make the most informed decision. And don't forget you have to factor in tax and title into your cost too, but for $4500 that shouldn't be too much..

Honestly with those scores, I don't think you'll have to hard of a time finding a relative cheap (close to or under 10%) interest rate. I would check with a local CU, esp if you already have an account with one. (and if you don't, I'd suggest you do, they are awesome).

[Anonymous]

The problem you are likely to run into is with the vehicle and the seller. You didn't give a lot of information but I can only assume that a vehicle priced at 4500 may be an older / high mileage model or through a private seller. Most banks and credit unions have an age and mileage limit at which they will finance a vehicle. And if the vehicle is with a private seller then it is also difficult to get a direct loan for the purchase. If these situations don't apply then I apologize and offer the information only for education of other forum members.

What is often possible is to take a collateralized loan from a bank or credit union secured by the vehicle title and this will add an installment loan to your report and help your building credit. In other words you pay cash for the car and get the title. Then borrow against the car from the bank. You probably won't get the full 4500 but any installment loan would serve your purpose.

[ceejx]

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@Anonymous wrote:

What is often possible is to take a collateralized loan from a bank or credit union secured by the vehicle title and this will add an installment loan to your report and help your building credit. In other words you pay cash for the car and get the title. Then borrow against the car from the bank. You probably won't get the full 4500 but any installment loan would serve your purpose.

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As someone whose taken out of a few of those loans, be warned they are very expensive... and you will have a high interest rate, so you have to ask yourself if it's worth paying what you will end up paying to get the benefit of an credit line. If you are, then go for it, just make sure you understand the price you're paying.

[djshaggy]

Thanks for the input folks.

I'm a long-time member of a Credit Union, and have been assured of likely approval for this loan.

The bank is aware of the age of the car (1996) and has a loan interest rate based on that, in combination with my credit score.

I am not that concerned about the expense of the loan interest becuase I will be paying it off, without penalty, before the 24-month term is up.

I'm going to go ahead and take the opportunity.

[djshaggy]

FYI. I should mention that the quoted loan rate was about 6%

[webhopper]

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@Anonymous wrote:

The problem you are likely to run into is with the vehicle and the seller. You didn't give a lot of information but I can only assume that a vehicle priced at 4500 may be an older / high mileage model or through a private seller. Most banks and credit unions have an age and mileage limit at which they will finance a vehicle. And if the vehicle is with a private seller then it is also difficult to get a direct loan for the purchase. If these situations don't apply then I apologize and offer the information only for education of other forum members.

What is often possible is to take a collateralized loan from a bank or credit union secured by the vehicle title and this will add an installment loan to your report and help your building credit. In other words you pay cash for the car and get the title. Then borrow against the car from the bank. You probably won't get the full 4500 but any installment loan would serve your purpose.

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I think what you should do is take out a secured loan against your cash, and then use the loan to pay cash for the car.  A secured loan will help build installment history, and is usually MUCH cheaper interest rate than what you'd be looking at with a used car loan... You then pay back the loan in installments, If I were you I would look at a 24 month repayment term.  At the end of 24 months, you get your 4500 back and you've got a 2 year tradeline ... its a win / win

Just my 2 cents!

[ceejx]

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@djshaggy wrote:

FYI. I should mention that the quoted loan rate was about 6%

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6%'s not particularly bad... is that the APR or the Interest Rate? APR should include all associated fees such as the loan origination fee

[ceejx]

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@webhopper wrote:

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@Anonymous wrote:

The problem you are likely to run into is with the vehicle and the seller. You didn't give a lot of information but I can only assume that a vehicle priced at 4500 may be an older / high mileage model or through a private seller. Most banks and credit unions have an age and mileage limit at which they will finance a vehicle. And if the vehicle is with a private seller then it is also difficult to get a direct loan for the purchase. If these situations don't apply then I apologize and offer the information only for education of other forum members.

What is often possible is to take a collateralized loan from a bank or credit union secured by the vehicle title and this will add an installment loan to your report and help your building credit. In other words you pay cash for the car and get the title. Then borrow against the car from the bank. You probably won't get the full 4500 but any installment loan would serve your purpose.

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I think what you should do is take out a secured loan against your cash, and then use the loan to pay cash for the car.  A secured loan will help build installment history, and is usually MUCH cheaper interest rate than what you'd be looking at with a used car loan... You then pay back the loan in installments, If I were you I would look at a 24 month repayment term.  At the end of 24 months, you get your 4500 back and you've got a 2 year tradeline ... its a win / win

Just my 2 cents!

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Actually that's not a bad idea, because you also earn interest on the secured loan. They are typically (not sure if required) put into an interest bearing (albeit small) CD that you get back (plus the interest) upon maturity of the loan. That will offset the percentages, and ensure you don't spend the money on something else.